Janus Capital Group: How "Making" a Statement Leads to Insulation from Liability

Talia, Colin, Journal of Corporation Law

I. INTRODUCTION
II. BACKGROUND
A. Section 10(b) and Rule 10b-5
B. Central Bank of Denver v. First Interstate Bank of Denver
C. Stoneridge Investment Partners v. Scientific-Atlanta
D. Janus Capital Group v. First Derivative Traders
E. The Supreme Court's Rationale as to Why JCM Did Not "Make"
the Misleading Statement
III. ANALYSIS
A. Why JCM Did in Fact "Make" the Prospectuses
B. Supporters of the Janus Decision and How a Sophisticated
Company Can Take Advantage of the Court's Decision at the
Expense of Investors
1. Supporters of the Janus Decision
2. Purposes of the Federal Securities Laws
3. The Holding of Janus May Encourage a Company to Separate
Corporate Formalities to Avoid Liability Under Rule
10b-5
IV. RECOMMENDATION
A. Congress Should Enact Legislation that Holds Entities
Liable for Aiding and Abetting Under Rule 10b-5
B. Policy Arguments Made by Supporters and Opponents of Congress
Enacting Legislation to Allow for a Private Cause of Action
Under Rule 10b-5
1. There Is No Need to Fear an Increase in Meritless
Litigation
2. The SEC Cannot Adequately Patrol Violations of Securities
Fraud on Its Own
3. Any Legislation Enacted by Congress to Hold Entities
Liable for Aiding and Abetting Would Help Deter Fraud
V. CONCLUSION

I. INTRODUCTION

In the fall of 2001, the collapse of Enron Corporation shook the American stock market to its core. The once renowned energy and securities company completed a stunning collapse, fueled by management fraud and deceit, on December 2, 2001, by filing for bankruptcy. (1) In February 2001, newly appointed CEO Jeffrey skilling bragged to analysts that Enron stock should be trading at around $126 per share. (2) Just days before filing for bankruptcy, however, the stock closed for the last time at a mere 260 per share. (3)

It was only after Enron's collapse that the extent of fraud and deceit among Enron's management became fully known to the public. (4) For years, Enron misled the public about the financial state of the company, inflating its financial statements to reveal a company with healthy profits and excess cash on hand. (5) In reality, however, Enron bled billions of dollars in liabilities, which its financial statements did not reflect. (6)

In 2002, Enron shareholders filed suit against dozens of Enron executives, several prominent banks, and a few notable law firms. (7) The banks included J.P. Morgan Chase, Citigroup, and Merrill Lynch; (8) the law firms included Vinson and Elkins, and Kirkland and Ellis. (9) The financial institutions named in the complaint allegedly helped Enron set up secretly controlled partnerships, disguise loans via offshore companies, and sell overvalued Enron assets. (10) This activity allowed Enron to shift billions of dollars off of its balance sheets, creating an artificial stock price, and ultimately misleading investors. (11)

The complaint alleged that the law firms helped issue false legal opinions, helped structure non-arm's length transactions, and helped Enron in its preparation of submitting false documents to the Securities and Exchange Commission (SEC). (12) Aside from helping Enron inflate its balance sheets, the banks, as underwriters of Enron securities, misled the public by approving incomplete or incorrect company statements. (13) The banks also engaged in complex financial maneuvers on behalf of Enron, intending to increase the value of Enron stock. (14)

Ultimately, the shareholders in the suit did not prevail, with the Fifth Circuit not allowing securities fraud claims to extend to secondary actors who did not make any misrepresentations or omissions. (15) The Enron scandal influenced Congress to enact the Sarbanes-Oxley Act in 2002. (16) The collapse of Enron, although an extreme example, highlights the enormous impact securities fraud can have on investors and individuals. …

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